Business objectives Flashcards
Total revenue formula
TR = P x Q
Average revenue formula
AR = TR/Q
Average revenue curve
Downwards sloping
D = AR
Marginal revenue
The additional revenue a firm makes by selling one extra unit
Total revenue curve
Increases as MR is positive, decreases as soon as MR is negative.
Total revenue
The area of a chosen point of the AR curve, under the demand curve
What happens to TR when demand is elastic and there is an increase in price?
Demand decreases by a more than proportional increase in price. TR decreases
How does PED change as price decreases along the AR curve?
Elastic -> unitary elastic -> inelastic
Where is revenue maximised?
And why?
MC = 0
- Firms may also maximise revenue in order to increase output and benefit from economies of scale
- In short term firms may use this strategy to eliminate the competition as the price is lower than profit maximisation point
Short run
When at least one factor of production is fixed
Long run
When all factors are variable, there are only variable costs
Variable costs
Exists in the LR and SR. Vary with output. E.g wages
Fixed costs
- Only in short run
- Don’t vary with output. E.g capital, salaries
Total cost formula
TC = TVC + TFC
Average fixed cost formula
AFC = TFC/Q
Marginal cost
Additional cost of selling one extra unit
Marginal cost formula
MC = Change in TC/Change in quantity
What happens to marginal cost when productivity increases?
Marginal cost decreases
Diminishing marginal returns
In the short run as more FOP are employed, initially productivity will increase but productivity will eventually diminish
Average variable cost formula
AVC = TVC/Q
Average total cost formula
ATC = TC/Q or AVC + AFC
What are the 6 types of internal economies of scale?
- purchasing economies
- technical economies
- managerial economies
- marketing economies
- financial economies
- risk bearing economies
Purchasing economies
Larger firms are able to negotiate much lower prices through bulk buying. Reduce their LRAC
Technical economies
Larger firms can invest on specialist capital to increase productivity
Managerial economies
Larger firms can employ specialist staff to increase productivity, therefore decreasing LRAC
Marketing economies
Larger companies can pay for advertising by spreading the costs over units sold
Financial economies
Larger firms can borrow for lower interest rates as the company is less risky
Risk-bearing economies
Larger firms can use revenue to diversify. If one fails, having other companies reduce the risk of failure
Reasons for internal diseconomies of scale
- alienation
- bureaucracy
- communication
Alienation
Alienation reduces employees motivation which decreases productivity
Bureaucracy
They have to hire more managers and people that do filing. When too much money is spent on this. Increases LRAc
Communication
Larger firms have slow communication. If the manager wants to receive a message has to go through many people before reaching the intended recipient
What is the minimum efficient scale? (MES)
When a firm first reaches its lowest LRAC
External economies of scale
Reductions in the LRAC as industries output increases.
Show do we show external economies of scale on the LRAC curve?
The entire LRAC curve shifts down
Profit formula
P = TR -TC
Normal revenue
TR = TC (covering opportunity costs )
Supernormal profit
TR > TC
Satisficing
It involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit
Minimum efficient scale
- the lowest point on a cost curve at which a company can produce its product at a competitive price
- at the MES point the company can achieve the economies of scale necessary for it to compete efficiently in the industry x
Shut down point
- P< AVC
- when variable costs cannot be covered
Break even point
- TC = TR
- after all costs are paid for there is neither profit nor loss
